Dennis' Mortgage Blog

Question of the week:  Why is the interest rate or cost higher than what is in the paper or even on your chart in your weekly update?

Answer:   Because you are doing a cash out refinance on a condominium at 80% loan to value with 695 FICO score and Fannie Mae is adding 3.75 points in tiered pricing adjustments.

One of the biggest changes from the mortgage industry collapse and resurrection that impacts most mortgage applicants has been the addition of more tiered pricing by Fannie Mae and Freddie Mac (GSEs).  Tiered pricing has always been part of the mortgage industry, what has occurred in the past few years has been the addition of more tiers and more categories for tiers to be added.

What is tiered pricing?  The GSEs have a base rate and price.  This base is what I use as my weekly rate quote: purchase transaction, 80% loan to value, single family residence, 740 FICO score.  From this base rate and price adjustments, up or down, are made depending on several factors including but not limited to the main ones:

• Type of transaction: purchase, rate and term refinance or cash out refinance
• Property: single family residence, condo, units
• Loan to value
• Credit score
• Occupancy
• Loan amount

Cash out refinances higher loan to values will have higher rates.  The highest FICO scores will have lower costs.  Owner occupied loans have lower costs and rates than investor or non-owner occupied loans.

Trading Rates and Costs.  In tiering prices the GSEs add discount points to a mortgage program.  We then take those pricing adjustments and adjust them through the rate.  On the scenario above, cash-out refinance for a condo with sub 700 FICO score, the adjustments of 3.75 points make the loan cost prohibitive.  However by increasing the rate the fee adjustments are absorbed into the higher interest rate, in this case the difference in rate from a rate and term refinance for a condo with a 740 FICO score the difference in rate at the same cost is 0.75%, three-quarters of one percent.

Most retail loans are in the one point cost range, to get to the one point range with tiered pricing adjustments are made to the rate to incorporate the pricing adjustments from Fannie Mae and Freddie Mac.  If your mortgage application has adjustments you can pay more in costs, in our scenario for a $300,000 mortgage you can pay $11,500 in pricing adjustments at closing or 0.75% in rate, or $139 more per month, to pull cash out of your condo with a 695 FICO score and 80% loan to value.  Most people choose the extra payment per month.

Regarding the tiered pricing I am very much in favor of the changes to add more tiers to mortgage pricing.  I feel Fannie and Freddie should have been more aggressive in their pricing adjustments in the 2000’s, particularly for loan to value and FICO adjustments. The most common statement regarding investing is “the greater the risk the greater the return.”  For years Fannie and Freddie were not pricing risk appropriately, borrowers with 680 FICO scores had the same price as borrowers with 800 FICO scores as an example.  With the increase in tiered pricing Fannie and Freddie are using risk based pricing, which is why your rate may not be the same as the one in the paper or on my weekly rate update.

On my website I list 24 Criteria For A Rate Quote for more factors that go into mortgage pricing.

Have a question for me?  Ask me!

Greece continues to impact our mortgage rates.  Like GM, Chrysler, Merrill Lynch and Fannie Mae and Freddie Mac, Greece is asking for a bailout, and will probably get it.  Every time Greece’s financial woes looked ready to plunge off a cliff into the Aegean Sea our mortgage rates would drop as investors did their flight to quality run and bought Mortgage Backed Securities and U.S. bonds.  Then the European Union or International Monetary Fund would make a statement about supporting Greece and it would look like the economy would be supported and investors sold MBS and bond investments and our rates would tick back up.  This morning it appears the dance may finally be over and it appears Greece will get its bailout—about $30 billion (yes bah-bah-billion. The bailout to save the nation of Greece is less than the bailout we gave GM, and the view is nicer, what a bargain) will be provided to Greece.

Will Anyone Heed The Warning??  Greece’s debt is about 125% of its Gross Domestic Product, i.e. the size of its economy.  Like many U.S. homeowners, when your debt extends far beyond the value of your assets and the debt payments exceed revenue it makes it difficult to a) raise more capital and b) pay off the debt.  Throughout Europe national debt is approaching or exceeds national GDPs, how long until Italy, Portugal, Great Britain, France… need bailouts and how much will they cost?  More importantly where will the money come from? 

It has become easy for Washington to say $50 billion.  If that is what we need to send to Rome to save the pasta and high performance sports car industries, what’s $50 billion in a budget (if we had a budget) over $3 Trillion?  What is it to bailout a country when we bailout individual corporations at home?  It’s just a small loan until they get their feet back on the ground.

In 2007 the U.S. national debt was 57% of our GDP, and many of us were saying it was too high.  Today our national debt is about 90% of our GDP.  America we have 10% equity, and it is shrinking.  With a current year deficit of approximately $1.3 Trillion, a budget from the White House projecting a $3 Trillion deficit plus unknown costs that keep getting higher for the health care reform bill, America is not too far behind becoming Greece, without the views.  When our national debt exceeds the size of our GDP, where will the money come from?

At some point cutting spending and the expansion of government needs to stop being a partisan political issue and become the basis of government budgets.  The largest states in the Union are operating on deficits, are on the verge of going bankrupt, where will the money come from?  Our Federal government is auctioning off hundreds of billions of debt monthly to pay for current operations, debt that will have to be paid off, where will the money come from? 

In economic news this week  Producer Price Index up, initial jobless claims down, existing home sales and new home sales up.   All positive economic news that push rates up.  Overshadowed by the  Treasury sending $129 billion into the bond market, remember with that would be the size of our annual deficit and we would complain?   

All economic data however is currently relegated to the backseat until the Senate completes its version of the reform for the financial industries.  There is much less focus outside of Washington and New York City on this set of reforms, the average American being much more concerned with government intrusion into their doctor’s office than their banker’s office.  However the long term effects on the economy from the proposed reforms will impact all of us.  Of primary concern to me is language in the bill that will take away the independence of the Federal Reserve.

Under the current bill being debated the Federal Reserve will come under the power of the Presidency.  While those in the majority may feel comfortable with President Obama and his Administration having extended control over our nation’s banks, how comfortable will they feel when his successor, and there is always a successor, has those same powers?  Under the power of the Presidency will be the Treasury and the Federal Reserve, the complete money supply will be subject to politics and not economics.  This makes me very uncomfortable as it concentrates too much power over the economy and economic decisions can be manipulated for political gain—more so than they are able to be used now.

A big impact on mortgage rates is the announcement by the Fed that it will begin to sell off the $1.25 Trillion in mortgage debt it purchased from January 2009 through March 2010 starting in the 3^rd, maybe 4^th, quarter of this year.  The added mortgage debt on the market will over-supply the mortgage backed securities market and push prices down and rates up.  I may revise my 6% estimate for rates at the end of the year upward.

Rates for Friday April 23, 2010: We experienced a lot of interday volatility in rates this week, what will be the norm with the Fed out of the market.  Despite the big swings daily this week going into this morning we were pretty flat to last Friday’s rates.  This morning the announcement by the Fed that it will sell its mortgage debt in about six months, plus Greece evidently working out its debt and economic woes, for now, caused the market to start of negative and stay there.  Result is that conventional and FHA hi-balance (over $417,000) rates have gone up while “regular” conventional and FHA rates are flat to last Friday.  My advice: Lock when you can, it’s too volatile to float.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.875%                            FLAT

30 year conforming-jumbo 5.125%                   Up 0.125%

30 year FHA    4.75%                                      FLAT

30 year FHA jumbo 5.00%                              Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked. 

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Regarding taking away the Fed’s independence and putting under an elected office, i.e. a politician, economist Milton Friedman had this to say regarding politically controlled central banks

“Inflation is a monetary phenomenon, but hyperinflation is always and everywhere a political phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country’s political economy.”

Have a great week,

Dennis